Strong ISM Cheers Stocks, Raises QE Questions

By Dave Kansas

AP

Still making stuff, to the surprise of some.

The strong ISM report has driven the stock market higher, as Matt noted, and raised some questions about the economy’s strength and the Fed’s plans for Quantitative Easing, expected to be announced Wednesday.

Some quick reactions from a gaggle of Street types. Basic view: Great report! Some questions about timing of QE and even one naysayer (Harm, you know who you are) saying the ISM is good, but…

Alan Ruskin, strategist at Deutsche Bank. The ISM report is “strong all around – stronger orders and production; decent employment…The price data remains buoyant.” Mr. Ruskin notes that the report will provide “significant fuel” for the regional Fed hawks who are chary about Quantitative Easing. He sees the dollar getting a modest boost from the report and the Fed getting room to approach QE with “maximum flexibility.”

Michael Shaoul, CEO of Oscar Gruss & Sun. The ISM’s New Order index jumped to 58.9, which Oscar Gruss & Son called “strongly positive,” suggesting the flash of summer “timidity” was unwarranted. It comes as no surprise that this has occurred against the backdrop of legislative inertia and prior to the launch of the expected (if unnecessary) launch of QE2 later this week.

Thomas Simons, money market economist at Jefferies. “The manufacturing sector is still expanding, and the index has bounced back to its highest level since May 2010. This month’s report shows expansion in nearly every area of the survey and confirms the theme expressed in some of the regional manufacturing surveys that the summer slowdown was a temporary soft patch and not the signal of the end of the expansion cycle. The boom phase of the manufacturing sector recovery appears to have ended, but expansion of activity continues.” Norbert Ore of the ISM perhaps said it best that the latest report represented a “shot in the arm” for manufacturing.

Harm Bandholz, Chief U.S. Economist, UniCredit Research. “Despite the strong report, we continue to expect that the manufacturing sector will keep losing momentum in late 2010/early 2011. Behind this is mainly a slowdown in domestic activity. The inventory cycle has probably peaked, while weaker capital goods orders (ex-aircraft) suggest that the brief investment boom is also tapering off. Ongoing support, on the other hand, is provided by solid foreign demand.”

Peter Boockvar, Equity Strategist at Miller Tabak. “Bottom line, the Sept. jump in inventories led to concerns about New Orders and today’s number dispels that concern for now. ISM said autos, computers and exports were key drivers of growth as ‘manufacturing continues to outperform the other sectors of the economy.’ While the US economy overall is still rather lackluster, data like today still begs the question of what is the Fed thinking with QE2?”

The Fed is thinking two things: 1. It’s told everyone it plans QE, so to back down now would not do much for credibility. 2. The Fed wants inflation. So, if there’s growth, Ben and friends seem eager to pour kerosene on that growth. This is where the regional hawks get nervous. They think the desire for inflation, even of the limited stripe, is a bit like opening Pandora’s box.

The markets like what they see. Surprising growth and the promise of accelerant in days ahead.

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